January 14 - Bloomberg (Gillian Wee): "Princeton and Harvard are leading a
rush by U.S. colleges and universities to sell bonds after investment losses
cut the value of endowments by a quarter in the past six months. Princeton
University sold $1 billion of debt... its first taxable issue since 1994, while
the University of Notre Dame raised $150 million. A sale last month by Harvard
University... brought in $1.5 billion."

Total Money Market Fund assets (from Invest Co Inst) surged $91.8bn to a record
$3.922 TN, with a 52-wk expansion of $733bn, or 23% annualized.

Reversing part of last week's large gain, total Commercial Paper outstanding
dropped $45.8bn this week to $1.719 TN, with CP down $130bn over the past year
(7.0%). Asset-backed CP declined $8.4bn to $771bn, with a 52-wk decline of
$56bn (6.7%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $543bn y-o-y, or 8.7%, to $6.813 TN.

Global Credit Market Dislocation Watch:

January 14 - Bloomberg (Tomoko Yamazaki): "Hedge funds posted their biggest
decline on record last year, losing $350 billion globally, as the credit crisis
crippled returns and forced investors to pull money out, an industry report
showed. About 90% of the money was lost in the three months to the end of November,
according to... Eurekahedge Pte. Funds that invested in North America declined
the most, posting a drop of $183 billion for the year, the report said."

January 16 - Bloomberg (Robert Schmidt and Craig Torres): "Renewed questions
about U.S. banks' viability are pushing regulators toward a new plan that would
remove toxic assets from bank balance sheets, in what may become the biggest
effort yet to unfreeze lending. President-elect Barack Obama's advisers see
an increasingly grave banking crisis and are considering proposals far more
sweeping than any steps that have been taken so far..."

January 16 - Bloomberg (David Mildenberg and Linda Shen): "Bank of America
Corp., the largest U.S. bank by assets, posted its first loss since 1991 and
cut the dividend after receiving emergency funds from the government to support
the acquisition of Merrill Lynch & Co. The fourth-quarter loss of $1.79
billion..."

January 14 - Bloomberg (Bradley Keoun and Lisa Kassenaar): "Vikram Pandit
is unraveling his empire to save his bank. Citigroup Inc.'s chief executive
officer said yesterday he would cede control of the Smith Barney brokerage
to Morgan Stanley. Pandit may also dump the CitiFinancial consumer-lending
unit, tag Tokyo-based Nikko Asset Management Co. for eventual sale and rein
in trading with the bank's own capital, people familiar with the matter said."

January 14 - Bloomberg (Howard Mustoe): "Small-cap technology companies from
Silicon Valley to Israel, struggling to raise enough money to survive amid
the credit crisis, are selling prized patents to stay in business. VocalTec
Communications Ltd. Chief Executive Officer Ido Gur said he needed to sell
15 of the Israeli company's 22 inventions to raise money... Irvine Sensors
Corp., whose infrared camera technology is used by the U.S. military, and TurfTrax
Plc, a U.K. owner of patents for monitoring horseraces, are also selling or
considering a sale of rights to stem a slump in revenue."

January 14 - Bloomberg (Alaric Nightingale): "As many as half of publicly
traded commodity shipping lines may breach their loan covenants by April after
a record collapse in hire rates, according to Royal Bank of Scotland Group...
The cost of second-hand capesizes, the largest group of commodity carriers,
plunged 70% last year, according to the Baltic Exchange..."

The dollar index gained 1.9% this week to 84.21. For the week on the upside,
Norwegian krone increased 1.0%. On the downside, the the New Zealand dollar
declined 7.7%, the Canadian dollar 5.0%, the Australian dollar 4.3%, the Brazilian
real 3.3%, the Swedish krona 2.9%, the British pound 2.8%, the Mexican peso
1.9%, the Euro 1.3% and the Danish krone 1.1%.

Commodities Watch:

January 15 - Bloomberg (Todd Zeranski and Alaric Nightingale): "Morgan Stanley
is seeking a supertanker to store crude oil, joining Citigroup Inc. and Royal
Dutch Shell Plc in trying to profit from higher prices later in the year...
'There's a lot of people looking for storage,' Denis Petropoulos... head of
tankers at Braemar Shipping Services Plc... said..."

January 14 - Bloomberg (Tony C. Dreibus): "Lumber fell the most allowed by
the Chicago Mercantile Exchange, dropping to the lowest price in almost 18
years..."

January 14 - Bloomberg (Nipa Piboontanasawat and Kevin Hamlin): "China's economy
overtook Germany's in 2007 to become the world's third largest, underscoring
the nation's increasing economic and political clout. Gross domestic product
expanded 13% from a year earlier..."

January 13 - Bloomberg (Li Yanping and Nipa Piboontanasawat): "China's exports
fell the most in almost a decade in December as the deepening global recession
cut demand for the nation's toys, clothes and electronics. Shipments dropped
2.8%, the customs bureau said... That compares with a 21.7% gain a year earlier.
Exports grew 17.2% for all of 2008, down from 25.7% in 2007."

January 14 - Bloomberg (Judy Chen): "The increase in China's foreign- exchange
reserves "masked" about $100 billion in capital outflows in the fourth quarter,
RBC Capital Markets said. China's currency reserves... climbed $40 billion
last quarter to $1.95 trillion....The slower pace of accumulation is partly
because foreigners dumped local assets and reversed bets on yuan gains, according
to strategists led by Nick Chamie, RBC's head of emerging-markets research."

January 13 - Bloomberg (Li Yanping and Kevin Hamlin): "China's money supply
and loans jumped more than economists estimated in December... M2... climbed
17.8% from a year earlier, the fastest pace in seven months..."

January 14 - Bloomberg (Chia-Peck Wong): "Hong Kong's sales of new private
homes fell to the lowest level since 1996 last year... The number of new non-government-built
residential units changing hands last year fell 47%..."

Japan Watch:

January 13 - Bloomberg (Toru Fujioka): "Japan's corporate bankruptcies rose
the most in eight years in 2008... Bankruptcies climbed 11% from a year earlier
to 15,646 cases last year, the fastest pace since 2000, Tokyo Shoko Research
Ltd. Said..."

Asia Bubble Watch:

January 15 - Bloomberg (Patricia Kuo and Aaron Pan): "Bond markets in the
Asia-Pacific region are having their busiest January for at least a decade,
with $32.3 billion in sales, as government guarantees and stimulus plans help
boost investor appetite. New issues almost tripled compared with the first
two weeks of last year, and more than doubled the $12.4 billion of January
2007..."

January 13 - Bloomberg (Andres R. Martinez): "Mexico will postpone construction
of its planned Punta Colonet port on the Pacific coast, and may scrap the project
entirely, as interested bidders struggle to find financing for the $4.88 billion
complex."

Unbalanced Global Economy Watch:

January 13 - Bloomberg (Theophilos Argitis): "Canada's trade surplus narrowed
to the lowest in more than a decade as energy exports plunged. The surplus
shrank to C$1.28 billion ($1.04 billion)..."

January 14 - Bloomberg (Colm Heatley): "Irish house prices fell almost 15%
in 2008 from a year earlier as rising unemployment and the global credit crisis
deterred buyers, according to... Daft.ie."

January 13 - Bloomberg (Matthew Brown): "The pound fell against the dollar
and the euro as reports showed the U.K. economy slumped the most in two decades
and home sales dropped to the lowest level since at least 1978."

January 14 - Bloomberg (Robert Hutton and Mark Deen): "Business Secretary
Peter Mandelson said the U.K. government will guarantee as much as 20 billion
pounds ($29 billion) of bank loans to medium-sized companies in order to keep
credit flowing during the recession."

January 14 - Bloomberg (Chris Bourke): "U.K. real-estate companies may need
to be rescued by shareholders this year to stay afloat. The largest commercial-property
firms need to raise as much as $20 billion this year to restore their balance
sheets at a time when financing is scarce, according to... Bernd Stahli, an
analyst at Merrill Lynch..."

January 14 - Bloomberg (Sharon Smyth): "House prices in Spain fell 8.8% in
December from a year earlier, according to Tasaciones Inmobiliarias SA, the
country's biggest home valuer."

January 14 - Bloomberg (Lorenzo Totaro): "Industrial production in Italy fell
more than expected in November as the global economic slowdown aggravated the
nation's worst recession since 1992 and prompted companies to cut output and
jobs. Production dropped a seasonally adjusted 2.3% from October..."

January 16 - Bloomberg (Milda Seputyte and James M. Gomez): "The Baltic countries
of Latvia, Lithuania and Estonia are facing unrest and street protests over
government austerity measures that may make political leaders casualties of
the worst economic collapse in the European Union."

January 15 - Bloomberg (Alex Nicholson): "Russia may have a 4 trillion ruble
($124 billion) budget deficit this year if the price of Urals crude averages
$32 a barrel and the average exchange rate is 34 rubles to the dollar, Interfax
reported."

January 15 - Bloomberg (Emma O'Brien): "Russia's ruble dropped to a record
low against the dollar after the central bank accelerated its devaluation of
the currency and Vedomosti reported the government slashed its estimate for
oil prices by 20%."

Bursting Bubble Economy Watch:

January 15 - Bloomberg (Dan Levy): "U.S. foreclosure filings jumped 81% last
year as falling house prices, tighter mortgage lending and the longest recession
in a quarter century battered property owners, RealtyTrac Inc. said. More than
2.3 million properties got a default or auction notice, or were seized by lenders..."

January 14 - Bloomberg (Craig Torres): "The Federal Reserve's top two officials
urged a new effort to address the toxic assets held by financial companies...
Chairman Ben S. Bernanke and Vice Chairman Donald Kohn said in separate remarks
yesterday that the illiquid investments raise questions about the 'underlying
value' of banks and may hinder 'private investment and new lending.' They called
for the government to remove or insure the assets."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

January 16 - Bloomberg (Shannon D. Harrington): "Moody's... said it expects
to cut the ratings on a 'large majority' of collateralized debt obligations
that bet on companies using credit derivatives... The so-called synthetic CDOs
may be cut three to seven grades in many cases after Moody's increased the
assumptions for company defaults and correlation of defaults."

Real Estate Bust Watch:

January 14 - Wall Street Journal (Prabha Natarajan): "The rapid reversal of
fortunes in commercial real estate is taking down yet another sector: apartment
complexes. Owners and developers of multifamily buildings are trying to stay
afloat as the deteriorating economy and escalating job losses create low vacancies
in apartments, difficulties in raising rents, and shortfalls in projected revenues
from these buildings... Much of the multifamily sector's problems center on
troubles in converting apartments to condominiums, as is the case in Miami,
or on the challenges in converting rent-controlled units to market-rate apartments,
as in New York's Manhattan."

January 14 - Bloomberg (Daniel Taub): "Construction spending on offices, shopping
centers, hotels and industrial buildings in the U.S. will fall this year and
next as the recession prompts businesses to delay or cancel plans, the American
Institute of Architects said. Non-residential construction likely will drop
11% this in 2009 and 5% in 2010..."

GSE Watch:

January 13 - Bloomberg (Jody Shenn): "The Federal Home Loan Bank of Seattle
joined its San Francisco counterpart in suspending dividends and 'excess' stock
repurchases, after the declining value of mortgage bonds likely led to a regulatory
capital shortfall."

Speculator Watch:

January 14 - Dow Jones: "Hedge fund GoldenTree Asset Management is offering
securities to investors who want to withdraw cash, The Financial Times reported...
In a letter to investors last month, GoldenTree said: 'Withdrawing partners
that do not elect to revoke their withdrawal request will receive their proceeds
primarily in kind. It is unlikely that any cash will be distributed.' This
has triggered protests from investors, many of whom would have problems disposing
of the securities as GoldenTree specializes in investing in complex, often
illiquid, debt instruments."

January 14 - Bloomberg (Tom Cahill): "Man Group Plc, the largest publicly
traded hedge-fund manager, said assets under management fell 21% in the last
three months of 2008..."

January 16 - Bloomberg (Gillian Wee): "Private-equity firms had their second-best
year of fund raising in 2008, leaving them with $1.02 trillion to invest in
leveraged buyouts, venture capital and real estate, according... Preqin Ltd."

Fiscal Watch:

January 13 - Bloomberg (Rebecca Christie): "The U.S. budget deficit soared
to a record in the first quarter of the 2009 fiscal year, surpassing the shortfall
for all of last year... The deficit swelled to $485.2 billion... For all of
2008, the shortfall was $454.8 billion. The monthly budget picture also worsened,
as the excess of spending over revenue widened to $83.6 billion in December,
compared with a $48.3 billion surplus a year earlier... 'We are inheriting
a daunting fiscal position," Peter Orszag, nominated by Obama to be the White
House budget director, told the Senate Budget Committee. The budget shortfall
in the 12-month period to Sept. 30 will likely exceed $1 trillion 'even without
steps to mitigate the economic downturn,' he said. Government revenue fell
14% to $237.8 billion last month, while spending soared 41% to $321.4 billion
compared with a year earlier."

Muni Watch:

January 13 - Bloomberg (Adam L. Cataldo): "State governments from Rhode Island
to California have run up estimated pension-fund losses of $865.1 billion...
Assets for 109 state funds declined 37% to $1.46 trillion over the 14 months
ended Dec. 16, according to the Center for Retirement Research..."

January 14 - Wall Street Journal (Stu Woo): "The past two days have felt like
summer in California, as unseasonable warmth sweeps the state -- possibly presaging
a third straight year of drought, a worrisome possibility for a state already
hit hard by the economic downturn. Another dry year could mean water rationing
for businesses and individuals. It could also slow business expansion and affect
the agricultural industry, ski resorts and efforts to keep firefighting costs
down, after a year in which state and federal officials spent $1 billion combating
wildfires... Even before this week, the state was facing a water shortage..."

New York Watch:

January 16 - Bloomberg (Michael Quint): "New York state raised its forecast
for next year's deficit by $128 million to $13.8 billion as a weakening economy
led to a projected 4.1% decline in wages instead of a 3% drop as previously
assumed."

Crude Liquidity Watch:

January 14 - Bloomberg (Haris Anwar): "United Arab Emirates-based banks may
face worsening loan quality as the region's slowing real-estate market increases
the prospects of developers defaulting, according to Moody's... 'Moody's is
mainly concerned about the loans to 'opportunistic' developers that have been
extended over the past four to five years," John Tofarides, a... Moody's analyst
said..."

January 14 - Bloomberg (Camilla Hall): "Tumbling oil prices are forcing many
of the richest Persian Gulf states to record budget deficits and limit a critical
source of foreign investment for poorer Arab countries."

January 15 - Bloomberg (Haris Anwar): "Abu Dhabi Investment Authority may
have lost $125 billion last year, pushing the sovereign wealth fund to second
place behind Saudi Arabia, as the global credit crisis eroded the value of
its assets, the Council on Foreign Relations said."

January 14 - Bloomberg (Anthony DiPaola and Glen Carey): "The Dubai developer
that's building the world's tallest tower delayed the project after the global
financial crisis halted a property boom in the Gulf."

A Divergence:

The 2009 stock market has quickly come face-to-face with the reality that
the worst of our banking system's problems have yet to pass. Today, Citigroup
reported an $8.3bn fourth quarter loss, about double what was expected. Bank
of America posted a quarterly loss of $1.8bn (its first loss since 1991). In
both cases, huge additional governmental support has been required.

The breakup of the great global "financial supermarket" is now moving briskly.
Citi management this morning announced a plan to create a new entity ("bad
bank"?) to aggregate "non-core" assets. This entity - including Citi Financial,
Citi Mortgage, the company's asset management business and a pool of securities
- will account for approximately $850bn of Citi's $1.95 TN of total assets.
The government has directly invested $45 billion in the bank and is now backing
$301bn of Citi's real estate loans and securities.

From Bank of America came the news of additional "emergency" governmental
support necessary to consummate the acquisition of troubled Merrill Lynch.
The government will inject an additional $20 billion of "capital" into the
deal (on top of an earlier $25bn), along with guarantees on an $118bn pool
of risk assets (said to include mostly Merrill residential and commercial mortgage-backed
securities, and Credit default swaps).

Bill Gross's current investment thesis "buy what they [the government] buy" seems
only to apply to fixed income. In the stock market, investors are scurrying
away from the banking sector where it has become apparent that the government
will be taking an ever-increasing role in ownership and Credit Policy.

It remains my view that our maladjusted economy is in the earliest stage of
what will prove a grueling and protracted adjustment period. And with Wall
Street finance incapacitated, there will be no alternative than for the banking
system to aggressively expand Credit. In rough terms, Bank Credit will need
to expand in the Trillion dollar range (10% growth) this year if there is any
hope of stemming depressionary forces and stabilizing the system. The way I
see it, system-wide Credit expansion of $2.0 TN or so will likely be required,
of which about half will be forthcoming from federal borrowings.

Keep in mind, however, that while Washington stimulus would be expected to
support general spending throughout the economy, it will be the almost sole
responsibility of the banking system (with governmental support) to extend
the necessary Credit to reverse the downward spiral in our nation's troubled
asset markets. This will be no small feat. Yet it may be a case that the banks
are today in such awful shape that they have no option but to accept massive
federal government aid and, along with it, a likely new mandate to get out
and lend. Expect the new Administration to hit the ground running.

Candidly, the current environment presents the most difficult macro analysis
of my career. The collapse of Lehman was a seminal event in U.S. and global
finance. Overnight, Trillions of Wall Street's financial claims lost their "moneyness." Trust
in history's most powerful mechanism of Credit expansion was shattered - and
for years to come will remain shuttered. Near- and long-term ramifications
are momentous, especially when it comes to the performance of asset markets.
But, at the same time, the collapse of the historic Credit Bubble has also
granted global policymakers an unprecedented mandate to inflate governmental
debt and obligations. The promise of basically unlimited deficits and Credit
guarantees is required to shore up the "moneyness" of the core of monetary
systems both at home and abroad.

Will these deficits and guarantees be sufficient to stabilize financial and
economic systems? What are the inflationary ramifications of such policymaking?
How long will the markets so contently accommodate the unmatched expansion
of government obligations - and along with it governmental intrusion into all
things financial and economic? There is no easy analysis or clear answer. Is
the renewed collapse in bank stocks a harbinger of a dramatic worsening of
economic prospects? Or could it perhaps be more a case of stock declines discounting
future shareholder dilution and other issue related to larger governmental
ownership and control?

As gloomy as economic reports and news headlines have been, there have actually
been scattered hopeful signs of system stabilization. Corporate debt markets
are showing unequivocal signs of life. January is on pace for the strongest
month of corporate debt issuance since May. And even the junk bond market is
showing a dim pulse. At the same time, municipal debt issuance this past week
was the most robust since the Lehman collapse.

It is worth noting that many key debt spreads remain significantly below the
levels from the dark days of November. At about 220 bps, investment grade spreads
are 60 bps below November highs. Junk spreads narrowed 30 bps this week. And
Credit Default Swap pricing for many topping The List of Credit Problem Children
- including MBIA, Ambac, MGIC, Sears, GMAC, Ford Motor Credit, and ResCap -
are today significantly below the crisis levels from a couple months back.

At 93 bps, agency debt spreads are about half the level of the November spike.
Agency long-term borrowing costs have sunk from above 5% during the fourth
quarter to today's 3.25%. It is also worth noting that benchmark agency MBS
yields are now below 4.0% after surpassing 6.0% in November. While mortgage
rates are no longer the invaluable indicator they were during the mortgage
finance Bubble, I don't want to completely discount them either. There has
already been a meaningful jump in mortgage refinancings. I would also expect
these rates to somewhat support housing transactions, although the weak stock
market and a barrage of job cut announcements weigh further on confidence.

In short, it is not so easy to discern an area of acute systemic crisis commensurate
with the pounding taken this past week or so by the banks and financials. I'll
this evening label this dynamic "A Divergence." It is possible that there is
acute stress out there not visible to the naked eye. Perhaps the major banks
are in worse shape than they appear. And housing and the economy could be taking
additional legs down, although this would be a surprising development considering
the current financing environment. The international backdrop remains problematic.
And one should assume there are more hedge fund shoes to drop. Reasonable analysis
would see speculator de-leveraging and liquidation overhanging the markets
for some time to come. So, it's an especially tough call - and A Divergence
that beckons for analytical focus.